Takeover Probe Drops Dow 43.31

NEW YORK -- The stock market, already stunned by the Boesky insider-trading scandal, suffered a major setback Tuesday with takeover stocks being pounded a second straight day.

The Dow Jones industrial average, after challenging record highs just last week, fell 43.31, to 1,817.21. The plunge, a 2.3 percent decline, was the fourth worst ever in points for the average.

Wall Street experts who have spent years buying and selling stocks said Tuesday`s session was one of the most emotional they have ever experienced.

``It`s complete panic,`` said Jack Baker, head trader at Shearson Lehman Brothers, one of Wall Street`s leading firms. ``It really is alarming, and, unfortunately, until it`s all out in the open as to exactly who is involved, which individuals are involved and which firms are involved, it`s going to be mass confusion in the investment community.``

Some market experts fear that the integrity of the market is at stake. They worry that the market will be damaged so much by the scandal that investors will be reluctant to participate.

Last week Ivan F. Boeksy, one of Wall Street`s most prominent speculators, agreed to turn over $100 million to the government in connection with allegations that he illegally used inside knowledge about takeovers for his own personal gain. Since then, there have been published reports that others involved with the stock market have been subpoenaed by the Securities and Exchange Commission in connection with its inquiry.

But the bloodletting did not stop with takeover stocks. Overall, 1,390 issues fell in price on the New York Stock Exchange, compared with a mere 283 that gained. And trading volume, thanks to the huge selling of takeover candidates, rose sharply, reaching 185.3 million shares. Monday`s volume was only 133.3 million.

Rumors also had their part in frightening the market, including one that Michael Milken, head of the high-yield bond department at Drexel Burnham Lambert Inc., had resigned. That rumor, traders said, caused heavy damage to the market, which had been only slightly lower early in the day.

Milken pioneered the sale of so-called junk bonds, which have been used widely in recent years to finance the attempted takeovers of some of the nation`s biggest corporations. But Robert E. Linton, Drexel`s chairman, denied that Milken had resigned. Another source said Milken, who is believed to have been subpoenaed by the SEC, was at his Beverly Hills, Calif., office Tuesday ``working away.``

Traders who deal in high-yield bonds said that the market was in a shambles. ``The junk bond market is a horror show,`` one trader said. ``The market`s gotten killed.``

The risk arbitrage departments of some of Wall Street`s biggest brokerage firms reportedly suffered severe losses in the sharp drop in the price of takeover stocks both Tuesday and Monday. Rumors were swirling that one firm or another had been hurt so badly that the jobs of managers of some arbitrage departments were in jeopardy. Nothing, however, could be confirmed.

By midday, these speculators were selling takeover shares in bunches, causing stocks such as Gillette to fall $7.25, to $60.

The reason for Gillette`s fall was simple. Ronald O. Perelman, the head of the Revlon Corp., last week offered to acquire Gillette in a deal that was contingent on being able to raise money through junk bonds to finance the transaction.

The prices of stock index futures contracts were also pulled sharply lower at times Tuesday. Whenever this happens, it places additional pressure on the stock market.

Stock traders said there were also indications that brokerage houses, worried about long-term damage to the stock market, were asking at least some customers to put more money in their margin accounts. The brokerage firms were especially worried, it was said, about borrowed funds that were being used for speculation in takeovers.

THE DOW`S BIGGEST DROPS

Here are the biggest daily drops in the Dow Jones industrial average and the percentage decline: